Federal Fiscal Court On Treaty Overrides - Is The Legislator Also Obliged To Observe Double Taxation Agreements?


The Federal Constitutional Court [Bundesverfassungsgericht, BVerfG] must decide whether or not the legislator is allowed to breach tax treaties with other countries. The Federal Fiscal Court [Bundesfinanzhof, BFH] is of the conviction that a tax norm is unconstitutional if it changes a double taxation agreement (DTA), and has passed on corresponding proceedings to Federal Constitutional Court by referral order (docket no.: I R 66/09). This could now overturn numerous similar tax laws which likewise alter DTAs to the detriment of the taxpayer (so-called "treaty overrides").

In the current proceedings, a taxpayer resident in Germany was unable to prove that his employee activities rendered in Turkey had been duly and properly taxed there. The tax office and the fiscal court of first instance therefore treated the income as taxable in Germany. The DTA with Turkey, however, stipulates that this income is tax-exempt in Germany. According to the old DTA, which was still applicable to this matter, this is the case irrespective of whether or not the income was duly and properly declared in Turkey. A norm of income tax law, in contrast, stipulates that the taxpayer is not exempt from German taxation in the event of a failure to prove the due and proper declaration of the income abroad.

The Federal Fiscal Court considers this norm to be unconstitutional for two reasons. To begin with, it only applies to income of an employee. Since there is no material reason for such limitation, the provision is unconstitutional as it violates the principle of equal treatment of Article 3 German Constitution [Grundgesetz, GG]. Secondly, and this is of fundamental importance, the German legislator is also obliged to observe the general principle of international law that contracts must be observed (pacta...

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